Key recommendations include:
- higher capital requirements to accommodate maximum harmonisation
- a flexible leverage ratio that measures gross derivatives exposure
- more capital against securitisations
- measures to encourage lending to businesses without credit ratings
- disclosure of risk weight methodologies and return on assets
Frédéric Hache, senior research analyst at Finance Watch and author of the report, said:
“The CRD IV package makes a significant contribution to increasing bank resilience but more needs to be done to address systemic risk and moral hazard. Only if capital requirements are high enough can we say that there is no need for national discretion.”
In addition to higher capital requirements, the report calls for a flexible mandatory leverage ratio of 3% to 5% (33x to 20x) from 2015 to complement the countercyclical buffers already in the draft legislation, with disclosure before then.
“Leverage is a core driver of systemic risk. History has shown the danger of ignoring off-balance sheet leverage, we must not make the same mistake with derivatives. Our leverage ratio proposal is therefore for an IFRS approach without derivatives netting”, said Hache.
The report also recommends a 25% residual risk weight against transferred exposures including securitisations, replacing 100% risk weights for unrated business loans with an average risk weight calculated under IRB for similar businesses (calculated for each country by EBA), greater disclosure of risk weighting methodologies through standard portfolio benchmarking, and a measure to reduce investors’ focus on return on equity by disclosing return on assets among key performance indicators.
The report also comments on governance, liquidity, zero risk weighting, implementation dates and various measures outside CRD IV, including structural separation, supervised deleveraging, the tax treatment of debt, and shadow banking.
Thierry Philipponnat, Secretary General of Finance Watch, said: “Our aim with this report is to promote confidence in the financial system and trust in banks, while ensuring that banks serve society better by focusing on their core function of financing the real economy.”
“CRD IV” refers to a package of draft European legislation comprising the Capital Requirements Directive IV and the Capital Requirements Regulation.